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Investors’ emotions have been running high, according to emails I’ve gotten over the past few days.
Emotions are a big enemy of investors. To control emotions, prudent investors must understand this one thing before making buy or sell decisions in this stock market. Let’s explore with the help of four charts.
Four charts
Please click here for an annotated chart of First Trust Dow Jones Internet ETF FDN, +0.42% My long-term readers know that normally when discussing the market’s direction, I use charts of the Dow Jones Industrial Average DJIA, +0.65% the S&P 500 Index SPX, +0.65% the Nasdaq 100 NDX, +0.80% or the Russell 2000 RUT, +1.26% I also often use charts of popular ETFs such as S&P 500 ETF SPY, +0.61% Nasdaq 100 ETF QQQ, +0.82% and small-cap ETF IWM, +1.13% Why use this oddball internet ETF now to make a point? The answer will become clear as you read on.
Please click here for an annotated chart of Nasdaq 100 ETF QQQ. For the sake of transparency, this is the same chart that was previously published.
Please click here for an annotated chart of Facebook FB, +0.79% For the sake of transparency, this is also the same chart that was previously published.
Please click here for an annotated chart of Amazon AMZN, -0.10% For the sake of transparency, this is also the same chart that was previously published.
Please observe the following from the charts:
• The internet ETF FDN experienced an overshoot, as shown on the chart. An overshoot occurs when investors become overly enthusiastic. When investors get over-enthused, a situation occurs in which most investors who are going to buy have already bought. Afterward, since there are not many buyers left, the slightest negative news causes a big push down.
• The internet ETF FDN is important because it contains the market leaders. When market leaders fall, the risk in the market increases. Internet ETF FDN counts Amazon, Facebook, Netflix NFLX, +1.69% and Alphabet GOOG, +0.25% GOOGL, +0.37% as its largest holdings. Of note is that Apple AAPL, +0.97% is not among them. It also includes popular technology stocks Salesforce.com CRM, +0.41% PayPal PYPL, +0.51% Twitter TWTR, +1.85% and Snap SNAP, +1.63% In addition to technology stocks, it contains popular online brokers E*Trade ETFC, -0.11% and TD Ameritrade AMTD, -0.81% which have been outperforming.
• The chart of Nasdaq 100 ETF QQQ was published by The Arora Report at the first sign of a failed breakout. Since then, important stocks have pulled back. In the pre-market on the day of the failed breakout, when QQQ was hitting highs, we shared with The Arora Report subscribers in the Morning Capsule that while the (momentum) crowd was aggressively buying, the smart money was lightly selling into the strength. In this case, that was an early warning of a potential reversal. To learn more, please see “This reversal shows there’s risk in the bullish stock market — and Facebook is further proof.” This was subsequently updated after the original publication.
• The chart of Facebook shows the overshoot. To learn more, please read “How low will Facebook’s stock fall before it rebounds to more than $300?”
• The chart of Amazon shows the overshoot. For more, please see “Amazon investors: Forget the headlines and focus on this one thing.”
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
The one thing
The markets are complex. Investors are often confronted with both bullish and bearish factors at the same time. There are many talking heads and gurus, but it is hard to figure out whom to trust. No wonder emotions often run high among investors; after all, their money is at stake.
Here is a simple way to control emotions before making a new buy or sell decision. Simply understand that popular stocks overshoot due to over-enthusiasm by investors. Overshoots are common. Overshoots often correct and sometimes lead to undershoots. Until there is more evidence, nothing nefarious is going on at this time.
What to do now
The best thing that investors can do is to learn how to size their positions correctly. At The Arora Report, in addition to what to buy and sell, every recommendation is accompanied by recommended position size.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.